Overhead Costs of Software Development

by Inna M. on Jan 14, 2022

The cost of software development doesn’t just consist of the developer’s salary. Find out what else is included in a typical software development project budget.

When you have a brilliant idea for a software product, you want it executed well and within an acceptable time frame. However, you likely don’t have an endless budget to spend on a project. This is why you also want to know how much your project is going to cost.

In every software development project, there are the most obvious expenses factoring into the cost, such as the developer’s salary. Still, there are also pricing factors that are not that obvious but can make a big difference in the overall project cost. 

These pricing factors, also known as overhead costs, can sometimes account for twice as much as direct software development costs. Here are the most common overhead costs of software development explained in detail.

1. Hiring and training personnel

This is probably the biggest part of your expenses when you are getting ready to launch a software development project. So much of the success of your project depends on the expertise and commitment of your development team, which means this is not something that you can save money on.

Whether you are assembling a development team from scratch or supplementing the missing pieces of the puzzle, such as mobile or back-end developers, you will face a similar procedure and range of expenses. Building a software development team is associated with the following costs:

  • Recruiting. With more job openings than software developers actively looking for a job, the recruitment industry is now more competitive than ever. Companies go to great lengths and invest a lot of money into their recruitment process just to attract the most qualified candidates. 
  • Hiring. Going through several rounds of interviews, drawing up a proposal, and signing up a contract, often on the candidate’s terms, costs money. And that includes paying for your HR manager’s and legal assistant’s time.
  • Onboarding. Even when you hire the most experienced software engineer, there will always be a gap between the time they become part of the company and they can actively begin participating in a project. The onboarding period, which can take from a few weeks to two or three months, is a mandatory requirement to help your new team member ease into the existing processes and practices. Plus, it will require your current employees to take their time off the ongoing projects to onboard the new team members, which will also be reflected in the costs.
  • Training. Software development is one of the rapidly changing industries, and it’s impossible to remain a good engineer without constantly upgrading your skills and learning about new technologies. When you have an in-house development team, you are also the one responsible for training — most importantly, financially.
  • Lost productivity. In most cases, you are not just hiring a team of developers to work with you on a single project. You want them to stay on board after that. However, a company doesn’t always go straight from one project to another. A transitional period is nearly inevitable, but the development team will still need to get paid.

2. Office expenses

Unless your company is a remote-first one and doesn’t need any office space whatsoever, which creates a challenge of its own, you will need an office to house your development team and other employees. These are some of the most common office-related expenses you will need to cover:

  • Rent
  • Maintenance and renovation
  • Heating and air conditioning
  • Lighting
  • Utilities
  • Furniture and decorations
  • Office supplies

Moreover, a modern and appealing office can become an asset of its own in your pursuit of the most competent software developers in the market. 

It’s safe to say that the IT industry professionals in particular have come to expect higher than average office conditions when they are job hunting. A modern interior, a convenient work station, and additional facilities such as a nicely equipped kitchen, an in-house gym with a shower, free parking, and a recreational zone not only increase the satisfaction of your employees and your appeal as an employer, but also cost a significant amount of money.

3. Equipment and communications

A software developer will spend most of their day in front of a desktop computer or laptop. And, unless you agree otherwise, they will be using company equipment. Many companies even provide computers for their employees to use at home. Moreover, since software development is a performance-intensive process, the equipment should not only be fairly modern, but also regularly updated at the company’s expense.

The next item on the list of overhead costs of software development is the cost of networking and communications. A steady internet connection for the whole company isn’t cheap. You also need to take care of the data storage, data transfer, and information security, as well as someone to maintain those systems for you.

4. Support staff

In many modern companies, software developers are viewed as the stars. However, an office cannot function without administration staff. To service even a small software development team, you will need the following in-house employees:

  • Office manager;
  • Administrator;
  • Accountant;
  • Technician;
  • Cleaner.

As your development team grows, your support staff and related expenses will need to grow as well. For example, the same HR manager won’t be able to handle both the recruitment process and the ongoing HR processes once your team reaches a certain size. So this part of the expenses is the one that will increase along with the changes in your team size.

5. Employee benefits

Depending on where you live and operate, the employer may be expected to provide his staff with a whole range of benefits. They usually start at Social Security (for the US) and can include anything from health insurance to retirement benefits.

In fact, employee benefits have become one of the ways for companies to attract the most competent personnel. This is why the size of the compensation package, the insurance coverage, and other benefits can be often too big to handle for smaller companies that just want to build high-quality software products.

Bottom line

The desire to cut costs on your software development project is as natural as the desire to get a decent product that will help you achieve your business goals. The good news is that you don’t need to compromise the quality of the end product just to save money on development.

Software development outsourcing can be the solution you’ve been looking for all this time. With all the benefits of working with top industry professionals and no overhead costs to cover, you get consistent results with a predictable budget and can scale your project or make any other important business decision in a matter of days.